Bitcoin: What's its Worth in Court?

By Robert T. Dunlap of Fitch Law Partners LLP posted in Business Litigation on Thursday, February 1, 2018.

The price of Bitcoin has recently skyrocketed, rising from $1200 per Bitcoin in the second quarter of 2017 to $ 10,000 per Bitcoin in 2018. However, the law has not kept pace: critical questions remain regarding how Bitcoin should be valued. For example, if Bitcoin is fraudulently transferred, how should damages be calculated? In February 2016, in the first case of its kind, the U.S. Bankruptcy Court for the Northern District of California held that, for the purpose of the fraudulent transfer provisions of the U.S. bankruptcy code, Bitcoins are not the equivalent of United States dollars. However, the court left open whether Bitcoin should be valued as a currency or a commodity.

In broad strokes, Bitcoin is a decentralized digital currency: there is no central regulating authority. Rather, there is a shared public ledger in which transfers of Bitcoin are recorded. This ledger accounts for all Bitcoin and is publicly viewable. Periodically, a number of interconnected connected computer networks, referred to as Bitcoin "miners," ensure that the public ledger has not been altered, which requires a substantial amount of computing power. The first network to compute all transfers and confirm that all is properly accounted is occasionally rewarded with a "free" Bitcoin. Hence, their designation as "miners."

The bankruptcy case described above was styled as In ReHashfast Technologies LLC. and involved a defunct corporation that sold computer systems to Bitcoin miners. The decision at issue arose out of an adversary proceeding by the bankruptcy trustee against a medical doctor who had allegedly been hired by Hashfast to promote their products on online message boards. The doctor had been paid 3000 Bitcoin, then valued at approximately $360,000, but performed a remarkably limited amount of work. And these transfers occurred suspiciously close to the time when Hashfast went out of business. The bankruptcy trustee, sensing that something else had gone on, brought an adversary proceeding against the doctor for fraudulent conveyance. One of the critical issues soon became the value of the Bitcoin: the 3000 Bitcoin are, by today's metrics, worth approximately $30,381,375.

Under 15 U.S.C. § 550(a), the bankruptcy trustee "may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property, from - (1) the initial transferee of such transfer or the entity for whose benefit such transfer was made; or (2) any immediate or mediate transferee of such initial transferee." The question was whether the bankruptcy estate could recover the current value of the Bitcoin or the value at the time of the transfer. The Internal Revenue Service, in an April 14, 2014 notice entitled, "IRS Virtual Currency Guidance," treated Bitcoin as property, to be valued more like a commodity than a currency. And the Commodities Futures Trading Commission has also treated Bitcoin and other "virtual currencies" as commodities to be regulated under the Commodity Exchange Act. Thus, it seems that there is at least a colorable argument that Bitcoin should be valued the same as a commodity.

Yet, in cases of fraudulent conveyance, there is no controlling law. And Bitcoin is increasingly used to hide assets, including business assets and marital assets. Marital property is supposed to be divided fairly and equitably upon divorce but "[t]he confusion surrounding the categorization of Bitcoin . . . frustrates courts' ability to properly value divorcing parties' assets and determine a fair distribution of marital property." Caline Hou, A Bit-Ter Divorce: Using Bitcoin to Hide Marital Assets, 16 N.C.J.L. & Tech. On. 74, 78 (2015). Unfortunately, on June 17, 2017, the bankruptcy trustee in Hashfast stipulated to a dismissal of the proceeding with prejudice, presumably because the parties entered into a settlement agreement. So the bankruptcy court never did determine how Bitcoin is to be valued in a case of fraudulent conveyance. And underlying questions about how to value Bitcoin in a number of circumstances, including divorce proceedings and business disputes remains undecided.

Fitch Law Partners LLP will continue to monitor developments regarding Bitcoin valuation as well as the industry responses thereto.

We invite you to learn more about Jeffrey A. Soilson, Robert T. Dunlap and Fitch Law Partners LLP's business litigation and family law practice on our website.